Author Topic: Buying house from my parents, what is the best way?  (Read 19299 times)

Khameleon

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Buying house from my parents, what is the best way?
« on: June 04, 2014, 12:06:25 PM »
We sold our house and are closing in a few weeks. We are moving into a smaller house (a 1/4 mile away) that my parents own (not their primary residence) they have rented it out for the past few years. The house is a two-family and our plan it to buy the house from my parents, for about 2/3 the current market value, and they will keep a 1/3 interest in the house with the long-term plan of them living in the smaller apt someday. We will not rent out the apt, but will use it for our own living space until my parents decide to move in.

So my question is how best to do this transaction. I want it to be beneficial for both parties while considering the following: tax implications, closing costs, cost basis going forward, etc. Has anyone done this and have some tips?

Both house are located in Massachusetts.

Some things I have considered:

1) Buy the house for $1 and then take out a home equity line (currently at 2.75%) to pay my parents the agreed upon price. Closing costs are only $99 this way, but I don't t know if this is even possible or what other tax / financial / legal consequences there might be

2) Take out a conventional mortgage to buy the house, but then I will get hit with closing costs and have to come up with 20%  down payment (which I have but would rather not have to use it for this)

3) Have some other type of arrangement to pay my parents back over time.

Regardless this is a great opportunity for us to reduce our monthly housing cost. We sold our house for $315K and will be paying $170K for my parents house.

What am I missing, what should my next steps be.... Go!

bacchi

  • Magnum Stache
  • ******
  • Posts: 3793
Re: Buying house from my parents, what is the best way?
« Reply #1 on: June 04, 2014, 12:22:59 PM »
The 75/25 split complicates things but I've looked into using something like this service:

https://www.nationalfamilymortgage.com/get-started/

You should be aware of IRS regulations. The loan rate and terms have to be comparable to standards or it's a gift/income.

http://www.nytimes.com/2010/11/05/business/businessspecial5/05MORTGAGE.html?pagewanted=all


Khameleon

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Buying house from my parents, what is the best way?
« Reply #2 on: June 04, 2014, 12:30:57 PM »
Thanks bacchi, I wasn't aware services to help with this kind of thing existed, I'll look into that for sure... thanks for the tip

former player

  • Magnum Stache
  • ******
  • Posts: 4424
  • Location: Avalon
Re: Buying house from my parents, what is the best way?
« Reply #3 on: June 04, 2014, 02:56:59 PM »
I'm probably misunderstanding this a bit.  But I have a few doubts as to what you are proposing.

Legally, you can either own the whole of the property jointly (in unequal shares) with your parents, or you can split the titles with you owning one apartment and your parents owning the other.  Do you understand the implications of each approach, and which are you going to agree with your parents?

You are moving to a smaller house which has two apartments, and are proposing to live in both apartments at the same time.   How will this work in practice? Are you planning to keep the two apartments physically separate with separate locks on separate front doors, in which case how does one family manage that?  If you are joining the two together, you have a single family house not two apartments, in which case there are potentially zoning and property tax implications. 

What are the potential timescales for your parents moving in?  What if they decided they wanted to move in only a few months after you do, would you be happy with that?  Are you proposing to pay your parents rent while you occupy their share of the property?  Who is to be responsible for repairs, insurance and taxes on your parent's share?  Is there going to be a formal contractual relationship between you and your parents which deals with all these issues?

Why are you proposing to occupy your parent's share of the property until they move in? If it is because you need the space in order to live comfortably in this smaller house, how are you going to manage when your parents want the space for themselves?  If you do not need the space, why will you be using it in the meantime?

Might it be simpler for you to buy the whole house subject to an agreement to rent the apartment to your parents for a nominal amount?

You and your parents may need to sit down with a real estate lawyer to consider the options.  I'd add in that if you have siblings who might have an interest in the inheritance of your parent's estate, it might be a good idea to get them on board as well.  Otherwise, if your parents have a financial interest in your home and when they die there are questions about how the estate is left, you could be in a sticky situation.

I don't think any of this is insuperable.  You are doing the right thing by looking at all the potential issues before going ahead.

Dollarbill49

  • 5 O'Clock Shadow
  • *
  • Posts: 42
Re: Buying house from my parents, what is the best way?
« Reply #4 on: June 05, 2014, 12:53:30 PM »
Another question that came to mind is:  Would you have to pay rent to your parents to occupy the portion of the house that you don't own?

payitoff

  • Guest
Re: Buying house from my parents, what is the best way?
« Reply #5 on: June 05, 2014, 12:56:57 PM »
You can also do a refinance and add your name on the loan and deed, this will incur lower closing costs than purchasing

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8633
  • Registered member
Re: Buying house from my parents, what is the best way?
« Reply #6 on: June 05, 2014, 01:09:30 PM »
Wait, do your parents own the house free and clear or have a mortgage?  If no mortgage , they could carry the mortgage for you and you make payments to them at the prevailing rate.  Seems like a win

Khameleon

  • 5 O'Clock Shadow
  • *
  • Posts: 7
Re: Buying house from my parents, what is the best way?
« Reply #7 on: June 10, 2014, 09:20:02 AM »
Thanks for all of the responses. I'll try to answer a few things to clarify the situation.

1) The house is a two-family, but there is access inside to the apartment, so we can open the door and get from side to side. This is more of a nice to have as it would give us some extra space, not 100% necessary.

2) My parents took out a HELOC on their primary residence to buy the rental property, they are looking for me to buy it for the amount they owe on the loan, 170K (house is appraised at 250k). The 80k difference is there share in the smaller apartment side, if they decide to live there someday.

3) We plan to meet with a lawyer and accountant soon to go over all the options, I wanted to get some ideas here first....


ShortInSeattle

  • Pencil Stache
  • ****
  • Posts: 576
Re: Buying house from my parents, what is the best way?
« Reply #8 on: June 11, 2014, 10:01:50 AM »
Also plan for an exit strategy. If you did decide to move somewhere else... how would that work?

These things can get messy if you don't consider all the angles. Good luck!